News

Lafarge Malaysia Berhad (LAFMSIA) announced that it has entered into a conditional share purchase agreement with PT Holcim Indonesia Tbk (Holcim Indonesia) to acquire its entire equity interest in Holcim (Malaysia) Sdn Bhd (HMSB) for RM330m in cash, which will be payable in USD.

Both LAFMSIA and HMSB are principally involved in the manufacturing and sale of cement. The deal, which is expected to be completed by 4Q15, will facilitate the consolidation of LAFMSIA’s manufacturing and sale of cement and ready-mixed concrete business with HMSB’s grinding plant facility (1.2m capacity) in Pasir Gudang, Johor. Other conditions are set out in Page 2.

Comments

We were not surprised with the acquisition, given that the ultimate holding company of LAFMSIA, Lafarge S.A. has become a subsidiary of LafargeHolcim Ltd from 10 Jul 2015. We gather that post completion of acquisition, HMSB grinding plant will contribute an additional 8.5% to LAFMSIA’s production capacity to 15.35m MT annually post-2015.

We believe the purchase consideration of RM330m is fair at PER of 17.9x, which is relatively lower than the average PER of local and regional peers at 18.4x. The PER of 17.9x is derived from the purchase consideration over normalised comprehensive income of HMSB of RM18.4m, based on the trailing 12 months up to 31 May 2015.

Earnings-wise, we estimate that Holcim’s grinding plant capacity will only add <1% to LAFMSIA’s bottomline, hence immaterial. Theoretically, we believe the positive synergies from the acquisition will generate: (i) cost savings in terms of centralised decision management and better purchase pricing due to larger economies of scale, (ii) operational efficiency via better arrangement of logistics and distribution, and (iii) capex synergies as Holcim’s grinding plant acquired is expected to contribute to higher production since it is currently up and running. Moreover, we gather that capex for Holcim’s plant is limited to maintenance expenses for now, as there is no expansion plan in place.

We understand that the deal is likely to be financed via a combination of cash and borrowings. Assuming 70:30 debt-cash funding, we expect net gearing to increase from net cash position to 0.1x. This is well below our maximum comfort net gearing level of 0.5x. Hence, we believe debt funding will be a viable way for the group.

Outlook

We believe that domestic cement demand should remain resilient in FY15, in line with our in-house construction sector’s GDP growth forecast of 7.8%.

Nonetheless, we remain cautious on the cement players’ earnings outlook given the persistent intense competition which will likely result in a price war. This is due to the expected 14% capacity expansion in Peninsular Malaysia until FY16.

Forecast

As earnings impact is relatively immaterial, we maintain our FY15E-FY16E CNP at RM305.7-350.5m.

Rating

Maintain UNDERPERFORM

Valuation

We maintained our TP to at RM8.25, based on unchanged FY16E PER of 20.0x. Our TP implies a -0.5 SD discount on 5- year historical PER.

We think that LAFMSIA is overvalued at this juncture (currently trading at a Fwd-PER of 21.7), given that the industry is still faced with intense competition. As such, we maintain LAFMSIA at UNDERPERFORM.

Risks to Our Call

Higher-than-expected cement prices

Lower-than-expected raw material and energy costs

Stronger-than-expected cement demand

Source: Kenanga Research - 21 Sep 2015